The Earned Income Tax Credit is a refundable tax credit available to low-income and moderate-income individuals and families who earn most of their money through working (rather than investing). Because it's a refundable tax credit, the Earned Income Tax Credit can actually reduce your federal income taxes to less than $0 if you qualify.
The qualifying income levels change every year, and there's an expansion in place through 2017 for working families with three or more dependents. The IRS provides a great tool to help you determine whether you qualify and, if you do, how much your credit could be.
Key Earned Income Tax Credit rules for 2014
To qualify for the credit for 2014, you must have no more than $3,350 in investment income for the year, and both your earned income and your adjusted gross income must be less than:
- $46,997 ($52,427 if you're married filing jointly) if you have three or more qualifying children
- $43,756 ($49,186 if you're married filing jointly) if you have two qualifying children
- $38,511 ($43,941 if you're married filing jointly) if you have one qualifying child
- $14,590 ($20,020 if you're married filing jointly) if you have no qualifying children
Some other rules:
- You cannot file as "married filing separately"
- You cannot file for the foreign earned income exclusion
- You cannot be a qualifying child on anyone else's return
- You must file an income tax return for the year
- You must either have a qualifying child or be between age 25 and 64 at the end of the year
If you qualify, the credit depends on your income and number of children. In 2014, it can be as much as:
- $6,413 if you have three or more qualifying children
- $5,460 if you have two qualifying children
- $3,305 if you have one qualifying child
- $496 if you have no qualifying children
Why the Earned Income Tax Credit matters
If you earn money from a job, you're probably paying some sort of taxes on your earnings. Social Security and Medicare taxes start at your first dollar earned. Additionally, if you have a regular job, your employer likely withholds income tax money from your paycheck in line with the IRS' guidance. That's money out of your paycheck before you ever see it. The Earned Income Tax Credit might help you get some or all of that cash back -- and potentially more -- when you file your taxes.
If you're supporting a family on a fairly low income, every penny counts. If you qualify, take advantage of the Earned Income Tax Credit to keep more of those pennies in your own pocket and less in Uncle Sam's.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.